Globalisation – Golden Straitjacket or Goldmine?
Lecture held
by Johan Norberg (Timbro, Stockholm)
at the Economic Conference in Zurich on December 1, 2004
What is globalisation? Here is a description from France’s president Jacques Chirac:
“Globalization means that the "butterfly effect" is everywhere at work. The mistakes of a
stockbroker in Singapore or the collapse of the Baht in Bangkok, the decisions of a Finnish
industrial concern, or what the Governor of Minas Gerais in Brazil decides to do about his State's
debt, have had consequences for the world as a whole.”
By the butterfly effect, Chirac thinks of a popularisation of chaos theory, which says that ”The
flap of a butterfly's wings in the Amazons might set off a hurricane in Texas”. This is way of
mystifying the globalisation process, making it seem incomprehensible and chaotic, as if
globalisation is extremely sensitive, and that the slightest change can send chocks through the
whole system. And that’s a misconception since globalisation has increased the opportunities to
spread risks and has decentralised decisions so that every single decision is less decisive for the
outcome. And certainly this might seem chaotic, but only because no single person controls the
whole system. Instead the decisions of millions of people every day, make the system work.
But as a matter of fact, the butterfly effect is an accurate metaphor for this view of globalisation,
because it happens to be a myth. As meteorologists can tell you, no butterfly is able to produce a
hurricane, whatever it does, and whatever the circumstances. Of course what happens in one
place has effects in other places, if they are connected, as the East Asian crisis showed. But as the
Irish meteorologist Brendan McWilliams has pointed out the Butterfly Effect has it all backward.
Butterflies are more affected by the weather than the weather is affected by butterflies:
"Butterflies require sunshine for mobility. They're cold-blooded creatures and need the sun to
flap their wings and fly".
I think this is the best place to start talking about globalisation. About how it creates a more
liberal and international climate in which workers and entrepreneurs can thrive. For me
globalisation is the fact that Vietnamese workers, who walked for hours to the factories ten years
ago, and went by bicycle to work five years ago. Today they drive motorcycles to work.
Vietnamese workers clogging the streets of Saigon on Chinese motorcycles, that’s the most
physical expression of globalisation I’ve experienced.
Because they could afford those means of transportation since Swedish and Swiss consumers
bought clothes and shoes from the American company that hired them – Nike.
When I visited Nike’s supplier in Saigon the local union leader told me that even the communist
party officials use the factories as positive example, of good business, where workers get much
higher wages and a good and healthy work place. The question management heard from the
workers most often was whether they would expand soon so that their relatives could also get
those jobs. To us those jobs look grim and horrible – something anti-globalist exploit to the full
– since we have 100 years of increased productivity behind us, but for the Vietnamese it’s the
first step away from poverty and misery. Absolute poverty in Vietnam has also been halved in ten
years, and since because of higher incomes, 2.2 million children have gone from child labour to
education.
As a matter of fact, those working for an American company in low-income countries receive 8
times the average wage in that country. It is not out of generosity, it is because of globalisation. Foreign
investments bring management ideas, capital, training and technology. This increases productivity
and if a worker can produce more, he is also more worth for the company, and so can receive a
higher wage.
In the general debate, this is called exploitation, but if better wages is exploitation – then the
problem in our world is that the poor countries aren’t sufficiently exploited.
And when labour intense goods can be produced in other countries, Sweden and Switzerland can
buy it there, and allow capital and labour to go into the sectors where we are more efficient.
Consumers get more purchasing power, and can buy new services and goods, which means that
the unemployed will bee employed there.
Globalisation is nothing else than the market economy – division of labour, forces of
competition, and so on – on a bigger scale. Several things that used to be the exclusive property
of some Western countries have begun to spread over the world, such as democracy, markets,
investments, corporations, ideas, means of communication, science, technology, and so on.
Facts and figures show that it works. The World Bank’s Global Economic Prospects 2005, shows
that economic growth this year is the highest in 30 years. In developing countries the prognosis is
6.1 percent, and 5.4 and 5.1 percent in 2005 and 2006. This means a per capita growth of more
than 4 percent annually. That’s more than twice the growth rate countries like Sweden and
Switzerland had when we industrialised. From 1780 it took England 60 years to double its
income per capita, 100 years later, Sweden did the same in just 40 years, 100 years later again,
Taiwan did it in just ten years.
Open poor economies grow faster than open rich ones. It is natural, because they have
more latent resources to harness and can benefit from the existence of wealthier nations
to which they can export and from which they can import capital and more advanced
technology, whereas affluent countries do not have that advantage. But economists have
not found any such general connection previously. The reason is simple: the economy in
protectionist developing countries can not use these international possibilities, and so
grow less rapidly than the affluent countries. But developing countries which had been
open to trade and investments, i.e. those most receptive to the influence of the industrial
nations, grow more rapidly than the open rich countries.
In other words, the rich get richer, and the poor get richer. But the rich do not get richer
as fast as the poor.
The number of absolute poor – people with less than $1/day – has according to the World Bank
been reduced by more than 400 million in the last two decades, even though world population
grew by more than 1.5 billion during the same time. And there are some convincing arguments
that the poverty reduction has been much bigger than this estimate.
Other indicators on living standards from governments, the UN and the World Bank all point in
the direction that mankind has never before seen such a dramatic improvement of the human
condition as we’ve seen in the last decades, an era when globalisation began to be really global.
During the last 30 years chronic hunger and the extent of child labour in the developing countries
have been cut in half. In the last half century, life expectancy has gone up from 46 to 64 years,
infant mortality has been more than halved, and illiteracy has come down from 70 percent to 23
percent.
The progress is the quickest in countries that are globalised, where markets have been opened
and foreign investments are welcome.
A recent World Bank report concluded that 24 developing countries with a total population of 3
billion are integrating into the global economy more than ever. Their growth per capita has also
increased from 1 per cent in the 1960s to 5 per cent in the 1990s. At the present rate, the average
citizen in these developing countries will see her income doubled in less than 15 years.
Something is being done right, in the world today.
Politics without power?
This is both because of technological breakthroughs and political decisions. And a very popular
conclusion is that this is because politics has become powerless, in face of the technological
forces, foreign investors and global institutions.
Thomas Friedman at the New York Times, a very astute observer of the globalisation process,
has said that nations now are forced into a “Golden Straitjacket”, composed of fiscal restraint
and open markets. And he says that: ”The Golden Straitjacket is the defining political-economic
garment of globalization. The tighter you wear it, the more gold it produces.”
Thomas Friedman likes this straitjacket. Above all, he mentions the gold that it produces. I would
mention the liberty it gives the people. We often confuse rulers with the ruled. The fact that
rulers lose power does not have to mean that the rulers do, quite the opposite of it means that we
get more power as consumers and investors.
Most critics of globalisation hate this straitjacket. They say that liberalisation and privatisation is a
way of emptying democracy of all its power. But democracy does not mean that governments
control as much as possible, it means that the state is controlled by democratic mechanisms.
But there is another problem with this idea of the straitjacket. It doesn’t exist. Sure, if people and
capital are more mobile, governments have to offer them fairly reasonable conditions to get them
to stay, but on the whole, the era of globalisation has come about because of politicians who have
realised that lower transaction costs, access to markets, and global production and distribution
chains have made it more profitable to go global. In a world where other markets were closed to
you, where the capital of rich countries stayed home and where it was impossible to get
information or equipment to other countries in a reasonable time, you didn’t stand to gain that
much from going global. Now you do. And therefore more and more countries have made the
decisions.
Globalisation is not a golden straitjacket, it’s a goldmine. And it’s easy to see that great rewards
await you if you equip diggers and go out in search for it. But you can stay home, and stay poor.
It’s fairly obvious that no one forces North Korea or Burma to globalise. But it’s also obvious
that rich countries stop globalisation from working in several sectors, as long as they are willing
to pay the price. The agricultural protectionism of the EU – and Switzerland, as well, by the way
– is one strong example. It stops developing countries from developing, it locks capital and
labour in one of our least efficient sectors, it forces taxpayers of paying half the EU budget in
agricultural subsidies and it forces consumers to pay twice as much for the food as they would
have on a free market.
But nothing else than economic rationality and human decency forces us to abandon it.
The European Union has stopped several attempts to subsidise national champions, but this is
not a strange, new threat from the outside, this is a disarmament process, which the members
have entered because they know that a war about who can pour most public resources into noncompetetive industries is a war with nothing but losers.
The big steps towards liberalisation and globalisation around the world has been unilateral
decisions on the part of countries who have seen the potential. In his book Free Trade Today, the
famous trade economist Jagdish Bhagwati points out that unilateral trade liberalization induces
imitation by demonstrating success and by increasing the influence of exporters in other nations.
Nations such as Estonia, Australia, New Zealand, Chile, India, Singapore and Hong Kong have
demonstrated the success of unilateral free trade reforms.
An interesting example is that the EU and Japan refused to negotiate reciprocal reductions in
protections for their financial and telecommunications sectors. But when the US successfully
opened up these sectors, both the EU and Japan unilaterally reduced protectionism in those
sectors. The WTO has been able to make progress only because the member countries got
convinced by the value of free trade, and liberalised themselves, and it fails now that there is a
lack of interest from the nations. The WTO is like a car without an engine, it has to be pushed by
the states in order to move forward.
Because governments have liberalised on their own terms and at their own speed, there is a
reason to ask whether things really have gone too far or whether they have not even gone far
enough.
Critics of globalisation say that the strong conditionality that the World Bank and the IMF forces
on the developing countries, in exchange for loans and bailouts means that their independence is
an illusion. They have to follow the orders.
Sure, if they want the loans. But the fact that those structural adjustment loans exist is another
way of increasing the choices of poor countries, rather than limiting them. A developing country
in fiscal chaos, or a balance-of-payment crisis would have to implement radical, wide-ranging
reforms to fix the situation, and restore confidence. Often the loans from the IMF is a way of
substituting vague promises of future reforms, for real reforms now. And since the IMF bail out
failed investments, they make sure that poor countries receive capital even though they haven’t
created an investor-friendly environment.
But why then do some economists think that the structural adjustment loans from the World
Bank and the IMF are stifling, even though they are systematically ignored? I can’t resist the
temptation to quote Bhagwati, this time from his In Defence of Globalisation (not to be confused
with an earlier book on globalisation called In defence of Global Capitalism):
"Why, then, do splendid economists such as Stiglitz, who was senior vice president of the
World Bank, think of conditionality as stifling, as if what is written is what is done? I
suspect that this is because they misinterpret as a huge influence the stroking that they
receive when they visit these client countries. They are met with excessive courtesy and
protocol at the airport, stay in penthouse executive suites, meet with prime ministers and
presidents, and wind up feeling that they are more important than they really are. The
notion that these countries are playing the game and manipulating them because they carry
bags of cash is beyond the egos that rise like helium-filled balloons in the higher-level
echelons of the Bretton Woods institutions." (p. 259)
So why do we all think that the politicians have lost power? My guess is that they want us to think
so.
When the traditional left collapsed and social democrats began to accept the market they
explained to their voters that they were forced to liberalize because foreign investors demand it.
They said that they had to introduce free trade reforms to keep the WTO happy, they had to
privatise because they had promised the World Bank to do that, they had to lower taxes because
corporations would go abroad otherwise – not because it was good in itself, and would create
great benefits. This was an easy way out, a way of convincing voters without having to go to the
trouble of being self-critical and explain that they have to re-evaluate everything they believed in.
The right made the same mistake. Margaret Thatcher’s argument for liberalization was the TINAdoctrine – There Is No Alternative. A Swedish center-right government echoed her in the
beginning of the 90s when they explained that their reforms were ”The Only Way”. But they
didn’t mention that this was a desirable way. Whenever the government explain that the people
do not have an alternative and that the ideologies are dead, you can be sure that people will get
suspicious. And rightly so. They will begin to search for alternatives, just about anything.
And that by the way is one of the explanations for the anti-globalisation movement. Voters might
be convinced that something is necessary, but when they get the impression that not even the
reformers think that reforms are desirable, of course they begin to resent globalization or the
particular institution that ”force” these changes upon us. And they will be longing for an oldfashion left or a populist right that don’t simply accept the ”necessary”.
Globalisation begins at home
Let’s go back to president Chirac’s butterfly effect. The butterfly expert Julian Donahue has been
asked what it would take for butterflies to have an impact on the weather, and replied: "If all the
members of a particular species of butterfly were to get coordinated and line up on a particular
plane, that would have an effect.” And he added “But that would take a level of social
organization that butterflies just don't have."
Interpreted into globalisation terms it means that globalisation still begins at home. Until and
unless countries take the steps of liberalising their economies and open up its markets, we won’t
have real globalisation. It’s only the decisions of billions of consumers and investors, and
hundreds of governments, that make globalisation possible. If globalisation is nothing more than
an extension of the classical market economy, as I have suggested, it means that the country must
build liberal institutions back home and get their economies in order, to be able to benefit. And
there are so many obstacles to this.
For example weak legal structures and property rights. The Peruvian economist
Hernando de Soto has showed that poor people in the third world have real estate
(buildings and the land they stand on) worth almost 10 trillion dollars more than is
officially registered. This is more than the combined value of all companies listed on the
20 biggest stock markets in the world.
Without clarity as to who owns what, the property remains “dead capital”. Properties
cannot be mortgaged, which would otherwise provide capital for financing the children’s
education or investments and expansion of the business. Thus, the most common way
for small entrepreneurs in affluent countries to obtain capital is to cut off in developing
countries. Millions of capable people with powers of initiative who could be the
entrepreneurs of the future become entrapped by poverty.
In European countries we have dealt with those problems, but because of an obsession with
security and stability, we have made it difficult to start the new businesses that could replace
those who fail in international competition. It’s about a lack of competition in our own
economies, labour market regulations that discourages entrepreneurs from hiring people, taxes,
benefits and labour costs that raise the price of labour above its productivity. The allegation of
liberal-capitalist world dominion has to be tempered by the observation that we today probably
have the biggest public sectors and the heaviest taxation the world has ever known.
To summarise: Businessmen still have to care about the local business climate, just like the
butterfly still has to care about the local weather. The fact that the multinational institutions like
the WTO only does what the countries tell them, means that a lack of interest in reforms at
home, won’t be compensated by a push from abroad, on the contrary, it will stifle the interest at a
multinational level as well.
National politics and local politics are still the most important forces for good or evil. It is still
able to make us benefit from globalisation, or to ruin the whole process. Globalisation starts with
local decisions. Global capitalism starts with local capitalism. Not because of golden straitjackets,
but because there are so many goldmines out there to discover and explore.